Philanthropy

Why Do People Really Give to Charity?

In February I wrote a post positing that people give to charity as a way to satisfy their deeply held need to find meaning in life. The post is now the number 2 result in Google for the phrase, “why do people give to charity.” The number 1 result is a publication of The Federal Reserve Bank of St. Louis titled, “The Economics of Charitable Giving: What Gives?” The paper discusses theories of giving labeled “Perfect Altruism,” “The Warm Glow,” and “Prestige,” and concludes:

“Although some people may be altruistic when giving, economics tells us that the dominant motivation is the internal satisfaction that individuals derive from the act of giving itself. Individuals derive utility from giving much in the same way they obtain satisfaction from buying a new car or eating at a restaurant; especially when the number of donors is large, and the social context of other people’s giving is overshadowed by the satisfaction of one’s own giving when considering how much to give.”

I think the paper is a bit misleading. When trying to predict behavior, economics assumes but does not prove that people act in ways that maximize their own self-interest. Economics does not “tell us” that internal satisfaction is the dominant motivation for humans. The Merriam-Webster dictionary defines altruism as, “unselfish regard for or devotion to the welfare of others” or “behavior by an animal that is not beneficial to or may be harmful to itself but that benefits others of its species.” But I believe that only an incredibly narrow view of life holds that helping others is somehow separate from helping ourselves. Humans are communal animals. Without “others” we find life intolerable. If a person sacrifices for another, it is not simply “unselfish,” it is because they would be completely miserable if they chose to look the other way. Any parent knows that the happiness and health of their children is more important than their own needs. This isn’t “unselfish,” it is just something hardwired into our DNA.

The narrative of philanthropy is dominated by the concept that people who give do so for personal gain. I’ve seen many references explaining that Warren Buffett’s gift to the Gates Foundation was a way for him to exploit a loophole to avoid taxes. However, I think that narrative is false. Humans are interconnected with each other whether we like it or not. The fact that helping others also helps us does not diminish the act of giving. It is the brilliant fact of life that makes community work.

I’d now like to address a number of counter arguments I received in response to my original post.

Comment: “…I wonder if the wealthy individuals who create these foundations do so because they are self-actualized or need a tax break.”

The idea that people give because they “need a tax break” is widely believed, but is completely disingenuous. My professional expertise is in helping people structure the financial side of giving in the best possible way. The definition of “best possible” depends on the person’s goals, but limiting taxes is always a consideration. But let me clarify, you cannot legally structure a charitable gift so that the donor receives a net increase in their wealth. If you give away $1,000, you might be able to structure the gift so that you reduce your taxes by as much as $700 (or even more). However, at the end of the day you still have less wealth than if you had kept your money and paid the taxes.

I am not saying that taxes have no affect on donations. Taxes often drive the timing of gifts. However, it is important to note that the decision to part with money is a difficult one for most people. Even after an individual decides they want to make a donation they often stall on actually going through with the gift. It often takes the approach of the year’s end for donors to finally give up the gift qualifying for that year’s tax deduction.

I get plenty of phone calls from people who are interested in setting up some sort of charitable vehicle for the sole purpose of generating a tax deduction. But once they learn how foundations, charitable trusts, and donor-advised funds work, they are always disappointed and end up not setting one up. The idea that wealthy individuals who are sophisticated about money and taxes would give money away just to generate a tax deduction simply does not make any sense.

Comment: “Mother Teresa once said, ‘give ‘til [it] hurts you.’ Only giving which hurts the giver in some way is supreme.”

The idea that goodness comes from pain is deeply rooted in some religions. Personally, I believe, as I wrote in my essay, that humans are hardwired to enjoy the act of helping others. Feeling happy and good about helping others is a sign of positive mental health. Needing to feel pain to feel good is called masochism.

I also don’t believe that all donations are rooted in self-actualization. Certainly, many people (myself included) enjoy the social approval that comes from our peers when we make a gift. But this isn’t bad. This is part of the hardwiring that encourages humans to be social animals.

There is one criticism of philanthropy I find compelling: the idea that some gifts are motivated by a reciprocal benefit that is paid in non-monetary terms—for instance, a gift could be given to a university with the hope that it will improve the donor’s children’s chance of acceptance. These kinds of gifts are absolutely real. But they are a small minority of philanthropic gifts. Since it is illegal for a donor to claim an income tax deduction for a gift made in exchange for something of value, these kinds of gifts are a problem of our tax code, not a problem with philanthropy.

Sean Stannard-Stockton is a principal and director of Tactical Philanthropy at Ensemble Capital Management. Ensemble Capital provides families both traditional investment management and philanthropic planning. He is the author of the blog Tactical Philanthropy and writes the column On Philanthropy for the Financial Times.